Article

Finance is no longer simply a back-office, administrative department; it’s a strategic supply chain -- a multifaceted, end-to-end flow of transactions, cash, value, and information from supplier to customer. SAP Financial Supply Chain Management helps this new species of finance function optimize both the order-to-cash and the invoice-to-pay processes -- and equips finance departments to drive the business, not hold it back.

Benchmarks of business performance
indicate that ERP systems and other enterprise
technologies have transformed customer and
supply chain processes, but that finance's
performance has hardly changed. While some
companies have profoundly improved the performance
of their financial processes through ERP systems,
financial functions are still neglected in
many businesses, and days sales outstanding
(DSO) and working capital needs are considerably
high in many industries.1 Finance department
costs consume more than 1% of revenues in many
companies, and CFOs struggle with poor transparency
of their daily cash flows.

In times when unprecedented economic uncertainty and
soaring shareholder expectations are putting every
function under closer scrutiny than ever before, the
finance function should be driving business, not holding
it back.

The primary objective for a better and more optimized
finance department is still the same: Manage cash and
tie up as little working capital as possible. The key
performance indicator in this context is the cash
flow cycle, which encompasses the time period from when
a supplier delivers materials until the receivables
department collects cash from customers (see sidebar
below). The longer the cash flow cycle is, the higher
the working capital needs; every reduction made within
the cash flow cycle will immediately free up liquid
assets. So how do you streamline the cash flow cycle?

Breaking Down the
Cash Flow Cycle

The cash flow cycle is the period of time
required for a corporation to receive invested
funds back in the form of cash. The full
cash flow cycle can be divided into two distinct
cycles:

The operating cycle -
the time period between acquiring inventory
from suppliers and the actual cash collection
of receivables

The cash cycle - the
time period between the cash payment for
inventory and the cash collection of accounts
receivables generated in the sale of the
final product

Therefore, the cash flow cycle is also defined
as days sales outstanding plus days
in inventory minus days in payables.
Reducing the length of the cash flow cycle
will immediately create liquidity.

Think of Finance as a Supply Chain

One approach is to consider finance itself as a supply
chain — a multifaceted, end-to-end flow of transactions,
cash, value, and information that touches customers,
suppliers, banks, and internal functions and relationships.
Unlike the physical supply chain, the financial supply
chain deals with the flow of cash instead of goods.
But the financial supply chain is clearly a supply
chain — and one that runs through a company's
business like a thread, tying together every function
and process. Just like in the physical supply chain,
every day that's lost in the cash-to-cash cycle
equals lost revenue.

The benefits of a financial supply chain go far beyond
cutting costs. Days in payables, for example, can be
reduced by decreasing payment terms. On the other hand,
companies want to avoid putting their relationships
with key suppliers at risk, so they must strategically
differentiate how they deal with their individual suppliers.
An efficient financial supply chain will drive forward
every aspect of the business, give management the tools
it needs for continuous improvement, and provide more
visibility into a company's financial supply
chain network to deal with ever-growing compliance
requirements.

What a Financial Supply Chain Means to Your Finance
Department

What do companies traditionally expect from their finance
department? Probably much more mundane transaction
processing than they should. Requiring finance to do
more with less people — another common overhead-reduction
measure — is simply not a viable option, especially
since finance is no longer just a back-office administrative
position, and is now being asked to take a more strategic
seat in the business.

The reasons why finance departments are now helping
to set strategic directions and make important business
decisions are clear. In a complex world, businesses
have become complex organisms — getting more
complicated day by day. The financial supply chain
deals with a supply network of commercial relationships,
with each member playing an integral role in delivering
the value proposition of the company at the hub.
It is a network that is highly evolved, sophisticated,
and dynamic, but one that can be a nightmare to manage
since finance is intimately involved in every activity
in each one of today's value networks. Processing
and transactions, governance of policies and procedures,
guidance on process management, information flows within
and beyond the organization — finance plays a
critical role in them all.

The Evolution of Finance

The result is a new species of finance function. Not
only must finance paddle with all its might to keep
up with the flow of transactions, but it must also
monitor the financial supply chain from an optimization
perspective. Finance must not seek to manage every
detail itself, but devolve workload and responsibility
to where it should rightly be located — within
the hands of the supply network's discrete members.
The new species of finance function will help companies
reap the benefits of an efficient financial supply
chain: reducing working capital needs, decreasing nonproductive
float, improving cash flow management, and shortening
settlement times. According to Gartner analyst Lee
Geishecker, "an efficient financial supply chain
is one of the key differentiators in the global economy
to free up [companies'] hidden working capital
resources."

SAP Financial Supply Chain Management (SAP FSCM) is
a suite of components that helps the finance department
cope with the challenges that integrated financial
supply chains pose — both on the sell
side (order-to-cash) and on the buy side (invoice-to-pay).
Sustaining revenue growth has always been one of management's
biggest challenges. Now, as competition intensifies
and customers become less loyal and more demanding,
keeping revenues up is more difficult than ever. Many
businesses have responded with sophisticated front-office
customer relationship management (CRM) solutions. But
all too often, back-office processes remain reactive
rather than proactive and are based on discrete, disjointed
tools incapable of drawing on the wealth of data across
the company.

The big benefit of sell-side FSCM is the provision
of high-quality, timely information to customers and
the sales force. Since not every customer is profitable,
today's organizations must understand the true
costs of servicing each customer — and therefore
the customer's real value. This means managing,
tracking, and measuring all customer-facing processes,
including those in the financial supply chain. Only
then can investments target acquiring and retaining
increasingly profitable customers.

Order-to-Cash: From the Back Office to the Front Line

To succeed, today's companies must serve their
customers quickly, consistently, and accurately. This
means integrating frontend processes even more closely
with backend data and business rules, and empowering
front-office staff to carry out some functions traditionally
handled in the back office. SAP FSCM provides a wide
range of tools to support and optimize all the processes
involved in the order-to-cash cycle (see Figure
1).

Figure
1

The Full Set of SAP Financial
Supply Chain Management
Components for Processes Across the Cash-to-Cash Cycle

SAP Credit Management

SAP Credit Management handles processes related to
managing customer credit lines. By integrating financial
and nonfinancial perspectives of the customer base,
SAP Credit Management enables an organization to reduce
credit risk and optimize credit terms on an individual
customer basis. For example, the Blocked Order List
function within SAP Credit Management provides credit
managers or sales representatives a snapshot of all
orders that cannot be processed because of an insufficient
customer credit limit (see Figure 2). This will promote
speedy processing of these blocked orders to avoid
upset customers or lost sales.

Figure
2

Credit Management Blocked Order
List

SAP Credit Management makes it possible to deploy
a standardized credit-control solution that integrates
data from multiple systems. As a result, accounts
receivable personnel can take proactive steps to
reduce credit risks and eliminate losses on uncollected
receivables. If the organization relies upon external
standards, SAP Credit Management enables credit-scoring
information from third-party services like Dun & Bradstreet,
Creditreform, or Deltavista to be transferred into
the solution. By integrating external scoring standards
with their own credit standards, companies can implement
a real-time solution that improves decision making
and reduces credit risk.

The centralized credit-rules engine provided with SAP
Credit Management enables businesses to segment customers
according to their creditworthiness and payment reliability,
which provides a powerful decision-support capability
for sales, marketing, and other customer relationship
management functions.

SAP Biller Direct

SAP Biller Direct displays account, billing, and payment
information via the Internet, meaning that customers
can access both their open items and any available
credits from the Web and offset these items against
outstanding receivables. Close integration with
SAP Dispute Management (see next section for more detail)
enables collaboration with business partners online
and allows customers to view the status of their
disputes, thereby improving customer relationship
management (see Figure 3). Tight
integration with SAP Cash and Liquidity Management
enables real-time visibility of bills and invoices
when performing liquidity management.2

Figure
3

Internet-Based Invoice Presentment
and Payment with
SAP Biller Direct

SAP Dispute Management

SAP Dispute Management supports the processing of receivables-related
disputes. Many companies have to deal with a huge number
of payment deductions or payment delays. These organizations
experience declining cash collection percentages
and eroding days sales outstanding.

SAP Dispute Management lets companies process disputes
using reason codes for the different types of business
transactions from which complaints might arise. The
dispute status, along with the reason codes, controls
subsequent actions on the dispute — including
notifying employees via workflow or generating an email
to customers. All information related to a dispute
is summarized in one central object: the dispute case
(see Figure 4). This is like an electronic folder bundling
all data and information available per customer dispute.

Figure
4

Dispute Case in SAP Dispute Management

SAP Collections Management

SAP Collections Management supports employees in receivables
management or in accounts receivable to manage receivables
proactively and prioritize accounts from a risk-management
perspective.

Employees can select the customer accounts for which
they are responsible from the company's receivables
balance. The worklist, which is generated daily in
this way, is an extract of the total receivables balance.
SAP Collections Management enables employees to navigate
the customer account directly from the worklist. There
they can see all of the information required for preparing
the customer contact in an overview (see Figure
5).

Figure
5

Customer Overview in SAP Collections
Management

Once a collection agent has an overview of the customer
account, he can contact the customer and document the
result of this initial contact in the system. For example,
he can create disputes or promises to pay and trace
them later at the invoice level.

Sell-Side Benefits of FSCM

Throughout the order-to-cash process, SAP FSCM equips
the front office with the tools and information it
needs to service customers, process orders, and collect
cash more quickly and effectively. Benefits are not
just directed toward the customer, however; integrated
financial functions can also help increase customer
profitability and reduce administrative costs.

Using electronic bills, for example, can save a company
up to 70% of its invoicing costs, enable non-EDI (Electronic
Data Interchange) companies to trade electronically,
and allow bills to be personalized. This personalization
creates greater cross-selling and upselling opportunities,
as well as higher lifetime value for each customer.

Another key example of a sell-side FSCM benefit is
in dispute management. Disputes cost companies and
their customers vast amounts of time and resources.
Processing an individual complaint can cost between
US$128 and US$640 — yet around 90% of all complaints
are justified, and are usually resolved by a credit
memo. Arming the front office with decision support
and dispute management tools to coordinate across
departments and quickly handle disputes can speed
up the process and dramatically reduce costs.

The Buy-Side Opportunity

SAP FSCM can also help companies improve their invoice-to-pay
process, which is often time-consuming, labor-intensive,
and purely paper-based, resulting in a lack of invoice
transparency, lost discounts, late payments, value
date losses, and poor bank and vendor relationships.
The finance function, and specifically accounts payable,
is integral to delivering processing improvements
that deal with high transaction volumes, decentralized
organizations, and security concerns, as well as
providing efficient exceptions management.

To improve and streamline the invoice-to-pay process,
companies are looking to engage straight through
processing (STP), the automation of processing
financial transactions end to end — from initiation
to settlement. SAP Financial Supply Chain Management
includes three solutions that can help companies
achieve this STP goal.

SAP Invoice Management

The SAP Invoice Management system allows companies
to process incoming invoices electronically and in
a structured manner. Available with the mySAP ERP 2005
release, this new solution provides functionality for
exception handling and analysis, and can be combined
with optical character recognition (OCR) software from
partners to scan paper invoices. Accounts payable clerks
can quickly identify incorrect or missing internal
information (wrong account assignments, for example),
as well as incomplete or wrong external information
(such as price discrepancies or duplicate invoices).

SAP Biller Direct

Beyond its sell-side functionality, SAP Biller Direct
is also available with pay-side invoicing capabilities.
Accounts payable departments in all industries are
often overburdened with vendor inquiries regarding
payment status. As a result, productivity is lost,
workloads are taxed, and accounts payable performance
metrics can deteriorate.

To achieve excellence in the accounts payable area,
corporations can use SAP Biller Direct as a Web-based
solution to present payment status information to
their suppliers and vendors. This self-service allows
vendors to quickly get answers for their account
inquiries and get detailed views of invoices and
payment history to examine individual transactions.

SAP In-House Cash

Multinational organizations often manage a complex
network of international business units and banking
relationships. The growing number of affiliates for
international organizations has led to a large increase
in the number of internal and external payments, as
well as bank accounts. SAP In-House Cash enables companies
to reduce substantial costs associated with cross-border
payments and global intra-company transactions.

With SAP In-House Cash, international companies can
centrally process payments made by their affiliates
by netting and consolidating internal accounts. This
internal netting allows considerable savings in the
administration of various banks, and internal and cross-national
payments. SAP In-House Cash also allows companies to
settle affiliates' debts with external business
partners (central payment).

Furthermore, this SAP FSCM component can receive payments
from external business partners and transfer the payments
to affiliates (central payment receipt). All these
payments immediately update cash position — the
central report within SAP Cash and Liquidity Management — and
thereby complete the cash manager's global view
on the company's incoming and outgoing cash flows.

Conclusion

Managing financial supply chains represents the next
area in corporate finance poised for innovation through
the use of ERP solutions. Businesses today, in a number
of industries, are transforming processes tied to their
most precious financial metric — cash flow. SAP
FSCM can greatly simplify financial supply chain management
efforts in many organizations. With the full set of
FSCM applications, companies can more easily address
the multifaceted challenges of managing cash flow and
optimizing working capital — critical elements
for successful financial performance today.

1- A
2002 study by Killen & Associates
states that, through their ERP systems,
companies could reduce their working
capital needs by as much as 20% to
25%, and a typical US$1 billion company
could save more than US$7 million in
annual costs.

2-
SAP Cash and Liquidity
Management helps you monitor
how your strategic planning
affects cash
flow — from both a macro
and a micro perspective. The
component allows companies
to efficiently manage and optimize
their liquidity situation.

Jürgen Weiss is
Director of Product Management in the
Financials General Business Unit (GBU)
at SAP AG. He has degrees in economics
and business administration from the
Universities of Heidelberg and Hagen.
Jürgen joined SAP in 1997 after
a previous position as PR Manager in
a large German bank. He has held various
positions at SAP and joined the Financials
GBU in 2000. Jürgen is globally
responsible for Financial Supply Chain
Management applications including Electronic
Bill Presentment and Payment, Dispute
Management, and Credit Management. Among
his responsibilities are the roll-in
of customer requirements and the rollout
of the SAP FSCM solution.